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Edited Transcript of GEVO earnings conference call or presentation 9-May-17 8:30pm GMT

Thomson Reuters StreetEvents

Q1 2017 Gevo Inc Earnings Call

ENGLEWOOD Jun 5, 2017 (Thomson StreetEvents) -- Edited Transcript of Gevo Inc earnings conference call or presentation Tuesday, May 9, 2017 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Geoffrey T. Williams

Gevo, Inc. - General Counsel and Secretary

* Michael J. Willis

Gevo, Inc. - CFO and EVP of Corporate Development & Strategy

* Patrick R. Gruber

Gevo, Inc. - CEO and Director

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Conference Call Participants

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* Amit Dayal

Rodman & Renshaw Research - Analyst

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Presentation

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Operator [1]

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Welcome to the Gevo, Inc. First Quarter 2017 Earnings Conference Call. My name is Vanessa, and I will be your operator for today's call. (Operator Instructions) Please note that this conference is being recorded.

And I will now turn the call over to Mr. Geoffrey T. Williams, Jr., General Counsel. Sir, you may begin.

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Geoffrey T. Williams, Gevo, Inc. - General Counsel and Secretary [2]

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Thank you. Good afternoon, everyone. And thank you for joining Gevo's First Quarter 2017 Earnings Conference Call. Earlier today, we issued a press release, which outlines the topics that we plan to discuss. I'd like to point out that the press release was inadvertently issued 2 hours earlier than we had intended. As in the past and going forward, Gevo expects to release its earnings press releases after-market trading hours conclude. A copy of the first quarter 2017 earnings release is available on our website at www.gevo.com. I would like to remind our listeners that this conference call is open to the media, and we are providing a simultaneous webcast of this call to the public. A replay of today's call will be available on Gevo's website.

I would now like to introduce today's participants from the company. With us today is Pat Gruber, Gevo's Chief Executive Officer; and Mike Willis, Gevo's Chief Financial Officer. On the call today, you will hear discussions of certain non-GAAP financial measures. Non-GAAP financial measures should not be considered in isolation from or as a substitute for financial information presented in accordance with GAAP. Reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures is contained in the press release distributed today and which is posted on our website.

We will also make certain forward-looking statements about events and circumstances that have not yet occurred, including, but not limited to projections about Gevo's operating activities for the remainder of 2017 and beyond. These forward-looking statements are based on management's current beliefs, expectations and assumptions and are subject to significant risks and uncertainties, including those disclosed in Gevo's annual report on Form 10-K for the year ended December 31, 2016, and in subsequent reports and other filings made with the SEC by Gevo, including our quarterly reports on Form 10-Q. Investors are cautioned not to place undue reliance on any such forward-looking statements. Such forward-looking statements speak only as of today's date, and Gevo disclaims any obligation to update information contained in these forward-looking statements whether as a result of new information, future events or otherwise.

On today's call, Pat will begin with a discussion of Gevo's business developments. Mike will then review Gevo's financial results for the first quarter of 2017. Following the presentation, we will open up the call for questions.

I will now turn the call over to Pat Gruber.

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Patrick R. Gruber, Gevo, Inc. - CEO and Director [3]

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Thank you, Geoff. And thank you all for joining us today. Following up on our earnings call of only a few weeks ago, our whole team at Gevo remains laser-focused on getting the company to profitability. As I said on the last call, we believe the best path to becoming profitable company is to return 100% of our grind and fermentation capacity at Luverne to isobutanol and our hydrocarbon products, namely ATJ, the alcohol-to-jet fuel and isooctane. We are executing on this plan and are well into the engineering work to make this happen. We believe that the isobutanol capacity of the expanded plan will be more than 12 million gallons per year, with the actual size and configuration being independent on customer contracts, capital requirements and financing. Given the level of engagement by customers for our ATJ and isooctane, we expect the majority of the isobutanol capacity will be processed further to produce hydrocarbons. We currently expect that the hydrocarbon capacity will be in the 8 million to 10 million gallons per year range although this number could change for a variety of reasons, including customer demand and sources of financing.

So in parallel, with us doing the inherent work, what do we believe are the things we need to accomplish in the near term to enable this build out [outlook burn] to occur? In our mind, it boils down to 2 key things: one, conclude the restructuring of our balance sheet to lessen our near-term liquidity issues and extend our runway, which we believe will give customers, partners and the investment community much more confidence in Gevo; two, sign up customers to long-term supply agreements, forward selling the products we expect to be producing from the expanded Luverne plant. As already mentioned, the nature of these contracts will dictate the configuration of the future plant, that is how much of each product should be produced.

We also believe that such contracts will open up new avenues for financing that would be much cheaper than doing straight equity financing. As an example, this may open up opportunities to secure government grants for lower cost project-oriented loans. So on the first item that is the restructuring of our balance sheet. As you all know, one of the major hurdles we face coming into 2017 was the senior secured debt with Whitebox that was scheduled to come due in 2017. Earlier this year, we were able to extend the maturity of this debt by a few months from March 15 to June 23, 2017, as well as to decrease the principal amount to $16.5 million. I'm really happy that a few weeks ago, we came to a longer-term solution with Whitebox by entering into an exchange agreement with them where they agreed to exchange all of their outstanding 2017 notes into newly created notes, which would come due in 2020. Mike will go into more detail on the terms of these new notes in a few minutes. But importantly, this extension should give us the time to do the build out of Luverne without putting any undue liquidity burdens on the company in relation to the senior secured debt. Not surprisingly, I really like that.

Also note, that shortly after the Whitebox announcement, we signed a long-term supply agreement with HCS Holding. That's the owner of Haltermann Carless brand. This for the sale of isooctane. I can't say whether or not restructuring was a key factor in HSC's decision-making or not. However, we do expect that this will be critical to us signing additional definitive agreements in the coming months and quarters. Note that the actual exchange and issuance of the 2020 notes will require stockholder approval. We believe the exchange with Whitebox is in the best interest of Gevo and its stockholders. I want to reiterate to our stockholders the importance of approving the exchange with Whitebox. I strongly recommend that the stockholders approve the exchange at our upcoming stockholders meeting on June 15.

Now turning to our second critical near-term goal, namely signing up customers for long-term supply agreements. One of our stated objectives for 2017 is to secure binding supply contracts for combination of isobutanol and related hydrocarbon products, representing at least 50% of the capacity of the expanded Luverne plant. As I just mentioned a moment ago, we recently signed up our first definitive purchase agreement for long-term supply of a product from the Luverne site with HCS, this very exciting milestone for us. While we still need to secure additional contracts, this was important for a few reasons. First, this agreement with HCS to supply with isooctane is precisely the type of deal we want to enter into with our customers. It covers multiple years and contains a pricing formula that is intended to provide a strong profit margin to Gevo. We believe that this will help us secure cheaper sources of capital to finance the buildup of Luverne. Having one of these contracts under our belt should help in negotiations with other parties.

Second, this agreement is a great reference contract for others. The economics of the entire expanded Luverne plant are dependent on the success of each of our product lines. Our customers understand this. So they generally have been reluctant to enter into agreements with us without seeing us gain traction with other customers across all of our markets. We believe getting this first agreement signed should create momentum to help us secure other isooctane contracts. But more importantly, we believe that this will also be helpful to securing ATJ contracts. The airlines, we don't really understand the isooctane market should get a lot of comfort that we are starting to sign up customers for other key hydrocarbon product, which happens to be the co-product for the ATJ production.

So let's talk specifically about the supply agreement we just signed with HCS. To start off with, HCS is one of the oldest chemical companies in the world. They are a EUR 600 million revenue company based in Germany. I'm pleased that our product, technology and prices passed muster in their eyes. HCS is an industry leader in the manufacturing of high quality hydrocarbons, especially chemicals. The agreement we just signed is consistent with a letter of intent that we announced earlier this year. And the agreement consists of 2 different phases. During the first phase, Gevo will supply HCS with isooctane produced at Gevo's demonstration hydrocarbon plant in Silsbee, Texas. This first phase commences in May of this year and will continue until the first large-scale commercial hydrocarbon plant is built at Luverne.

As stated in the HCS press release, we estimate that this agreement could generate up to $2 million to $3 million of gross revenue annually. During the second phase, HCS will purchase approximately 300,000 gallons of isooctane per year with an option to buy an additional 100,000 gallons annually under the 5-year offtake agreement. The contractually agreed upon selling price is expected to bring an appropriate level of return on capital that's required to build out the existing facility at Luverne. And note specifically in this case, the isooctane is sold into the EU. [Sovereigns] are irrelevant. We look forward to getting that expanded Luverne facility up and running and the hydrocarbon plant running, so we can supply these guys. Note also that HCS plays a wide range of markets, covering both chemicals and fuels. As a result, both of us believe that isooctane is just the first product we will be able to sell to HCS. There may be opportunity to sell them isobutanol and ATJ as well. So as I've said, this is an exciting milestone for Gevo, and I really expect that this is only the first of multiple contracts that we will be in a position to talk about in the near future.

Turning to my last topic. I would like to provide a brief update on the operations at our Luverne facility. As we reported on the last earnings call, our current isobutanol production goals are not to maximize gallons, rather to align our production with our market development efforts. We will also produce isobutanol batches in order to generate key learnings for our future production at the expanded Luverne facility. These are the proved out ways to decrease our isobutanol production costs or to decrease the capital required to do the actual build out of the Luverne facility itself. This means that there will be periods when we don't produce isobutanol. When we aren't running isobutanol, we run ethanol only. This makes more financial sense since it improves the cash flow profile of the Luverne facility. We expect to operate this way until the Luverne plant is expanded. Also until we complete the Luverne expansion, we are dependent upon using some old equipment at Luverne, some of which is almost 20 years old. By operating the plant for ethanol only, we believe that this will extend the life of some of these assets. The more we can bridge ourselves from now to the completion of the Luverne expansion, the more we will have the flexibility to produce isobutanol in campaigns when we actually want to.

In the first quarter of 2017, we produced approximately 100,000 gallons of isobutanol. In over certain periods during the quarter, we did, in fact, produced ethanol only. In the second quarter, we may elect to produce only ethanol given our current isobutanol inventory levels.

I would like to conclude my prepared remarks with a few thoughts. In 2016, we were able to validate to customers and partners that the isobutanol production technology fundamentally works on a consistent repeatable basis in a commercially-sized production line, while achieving our variable cost targets. In 2017, it looks like we have secured a path to successfully restructure our balance sheet, subject of course to shareholder vote. And we signed our first definitive supply contract with HCS and hopefully, several more agreements to come. We've all been frustrated by the delays and setbacks we've had in reaching this point, but I now believe that we are in the best position in this company's history in terms of achieving commercial success and ultimately, profitability. I want to thank all of our stockholders, partners and customers for their support and I'm looking forward to an exciting remainder of 2017 and beyond.

With that, I will now turn the call over to Mike. Mike?

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Michael J. Willis, Gevo, Inc. - CFO and EVP of Corporate Development & Strategy [4]

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Thank you, Pat. Gevo reported revenue in the first quarter of 2017 of $5.6 million as compared to $6.3 million in the same period in 2016. The decrease in revenue during 2017 is primarily a result of the production and sale of approximately $5.5 million of ethanol, isobutanol and distiller grains at the Luverne plant as compared to $5.8 million in the first quarter of 2016. This decrease in revenue was mainly due to lower ethanol production and distiller grain prices in the first quarter of 2017 versus the same period in 2016.

During the first quarter of 2017, hydrocarbon revenues were $0.1 million, down $0.2 million versus the same period in 2016, principally as a result of the shipment of (inaudible) during the quarter.

Gevo also generated grant and other revenue of $32,000 during the first quarter of 2017, down $0.2 million as compared to the same period in 2016. The decline was primarily due to the completion of our project with the Northwest Advanced Renewables Alliance or NARA in the third quarter of 2016.

Cost of goods sold was $9.4 million in first quarter of 2017 versus $9.2 million in the same period in 2016. Cost of goods sold included approximately $7.8 million associated with the production of ethanol, isobutanol and related products and approximately $1.5 million in depreciation expense. Gross loss was $3.8 million for the first quarter of 2017 versus $2.9 million for the first quarter of 2016.

R&D expense for the first quarter of 2017 increased to $1.2 million compared to $1 million for the comparable quarter in 2016, due primarily to an increase in employee-related expenses. SG&A expense for the first quarter of 2017 increased to $2.2 million compared to $1.9 million for the comparable quarter in 2016, also due primarily to an increase in employee-related expenses.

Within total operating expenses for the first quarter of 2017, we reported approximately $0.1 million for noncash stock-based compensation. For the first quarter of 2017, we report a loss from operations of $7.2 million, up $1.3 million from a loss from operations of $5.9 million in the first quarter of 2016. In the first quarter of 2017, cash EBITDA loss, a non-GAAP measure which is calculated by adding back depreciation and noncash stock-based compensation to GAAP loss from operations, was $5.4 million compared with $3.9 million in the same quarter of 2016. Interest expense for the first quarter of 2017 was $0.7 million, which was down $1.4 million as compared to same quarter last year. The decrease was primarily due to the lower principal balances of both our 2017 and 2022 notes. During the 3 months ended March 31, 2017, we incurred a noncash gain of $3.3 million from a change in the fair value of derivative warrant liability. During the first quarter of 2017, we also incurred a noncash loss of $0.3 million due to the quarterly mark-to-market valuation of the 2017 notes.

During the first quarter, we also incurred a noncash loss of approximately $1 million as a result of exchanging an aggregate of $8.4 million principal amount of the 2022 notes for shares of our common stock in January. For the first quarter of 2017, we reported a net loss of $5.9 million or a loss of $0.51 per share based on a weighted average shares outstanding of 11,584,595. This compares to a loss of $3.6 million in the first quarter of 2016 or a loss of $3.13 per share.

In the first quarter of 2017, Gevo recognized net noncash gains totaling $2 million due to changes in the fair value of certain of our financial instruments such as warrants, convertible debt and embedded derivatives. Adding back these noncash losses or gains resulted in a non-GAAP adjusted net loss of $7.9 million in the first quarter of 2017 or a non-GAAP adjusted net loss per share of $0.68. This compares to a non-GAAP adjusted net loss of $8 million in the first quarter of 2016 or a non-GAAP adjusted net loss per share of $6.97.

As we announced a few weeks ago and as Pat discussed a moment ago, on April 19, 2017, we entered into an Exchange and Purchase Agreement with Whitebox pursuant to which they agreed subject to certain conditions to exchange all of the outstanding principal amount of the 2017 notes for an equal principal amount of the company's newly created 12% convertible senior secured notes due in 2020. Pursuant to the exchange agreement, we also granted the holders an option to purchase up to an additional aggregate principal amount of $5 million of the 2020 notes on substantially the same terms. The key terms of the 2020 notes are as follows. The notes will mature on March 15, 2020. The notes will accrue interest at 12% per annum, with 10% payable in cash and 2% payable as PIK interest. The notes are convertible at the option of the holders into shares of the company's common stock with an initial conversion price equal to lesser of $1.196 per share or a premium of 15% to the closing price of the company's common stock on the date of the exchange.

The holders will also have onetime right to reset the conversion price upon any equity financing that occurs within 180 days following the exchange. Following the exercise of this reset provision, the holders will also have a right to consent to certain equity financings during that 180-day reset period. The notes will also provide for certain make-whole payments to be made to the holders under certain circumstances. For a more detailed description of the terms of the purchase agreement, the exchange and the 2020 notes as well as a copy of the purchase agreement and the form of indenture pursuant to which the 2020 notes would be issued, please see the current report on Form 8-K which we filed on April 20, 2017.

In parallel with signing the exchange agreement, we also entered into the Eleventh Supplemental Indenture relating to the 2017 notes. This provided for, amongst other things, the elimination of the $2.6 million interest reserve for the 2017 notes. As a result, these funds released on April 20, which resulted in an increase to Gevo's cash and cash equivalents by $2.6 million.

The exchange contemplated in the exchange agreement and the ultimate issuance of the 2020 notes is conditioned on the approval by Gevo's stockholders of the potential issuance of 19.99% or more of our outstanding common stock upon the conversion of or otherwise issuable in relation to the 2020 notes. Gevo's management and board believe that this exchange is an important milestone for Gevo and puts us in a much more solid position to execute on our business plan. As a result, we strongly recommend that stockholders approve the exchange at our 2017 Annual Meeting of Stockholders to be held on June 15.

With that, I'd really like to thank our stockholders for their continued support at Gevo. We'll now open up for questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And I see, we have our first question from Amit Dayal with Rodman & Renshaw.

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Amit Dayal, Rodman & Renshaw Research - Analyst [2]

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Congrats on the recent developments. Those lines, this HCS-related announcement, has that prompted any other discussions with other potential customers around similar agreements?

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Patrick R. Gruber, Gevo, Inc. - CEO and Director [3]

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It has in that. HCS is a pretty famous company, unfortunately not here in the U.S., but in Europe they are. And so people took notice of that. And what's interesting is about isooctane and isooctane is the major component of gasoline and in fact, that’s what they're going to be using it for is for really high end gasolines and reference fuels and things like that. The price that they're paying from us now and in the future is that quite a premium. So people take notice of that and of course, it's relevant as we discuss isooctane with airlines because whenever we produce hydrocarbon from isobutanol, we get a mixture of jet fuel plus isooctane. So the airlines and the jet people are keen on seeing what we do with the isooctane.

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Amit Dayal, Rodman & Renshaw Research - Analyst [4]

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Got it. In regards to the extension on the debt maturities, etcetera, is the shareholder -- what coming up in June, is that sort of the final step in completing that process?

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Michael J. Willis, Gevo, Inc. - CFO and EVP of Corporate Development & Strategy [5]

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It is.

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Amit Dayal, Rodman & Renshaw Research - Analyst [6]

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Okay. Got it. And then in terms of the outlook, you provided an outlook for 2017 earlier in the year. Are you sort of maintaining that outlook? Is there any sort of updates to that?

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Michael J. Willis, Gevo, Inc. - CFO and EVP of Corporate Development & Strategy [7]

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We've not changed guidance at this time.

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Amit Dayal, Rodman & Renshaw Research - Analyst [8]

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And then in regards to the build out at Luverne coming up, when will you have more concrete sort of plan of execution and estimates of costs, et cetera?

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Patrick R. Gruber, Gevo, Inc. - CEO and Director [9]

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That would be later this year. We'd be further along with the engineering. So far, it's all looking pretty good though. We like where we are on the engineering around the hydrocarbon plant. When you use isobutanol as a raw material, it's clean due to the hydration chemistry, to rip off that oxygen and left with butylene, that's a clean chemistry and then you go forth and make the octane in the jet fuel. It's all coming together really well. And of course on the isobutanol side, that we know how to do because we just built fermenters last year, a year ago. So we're pretty clear on what that costs.

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Amit Dayal, Rodman & Renshaw Research - Analyst [10]

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Got it. And then just in terms of market development, final question from me. You guys have been pretty busy with just dealing with debt-related issues, etcetera in the early part of the year. Going forward, what are we going to be doing differently? Are we getting more aggressive on the market development side, any sort of color on or specifics on what we are going to be doing to build the pipeline to match some of our production, etcetera?

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Patrick R. Gruber, Gevo, Inc. - CEO and Director [11]

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Yes. So for us, there is 3 big market areas that are going to matter. Number one is the jet fuel. The jet fuel is interesting because we have [left-ons] out there. There's other people that are in negotiation. And we're going to move those contracts along. That's our intent. And our stated goal for the year is to have 50% of our output of that expanded Luverne plant covered with definitive contracts. The jet fuel is interesting. We want multiple players there, and the reason we want multiple players is because we're not just focused -- we want to get the Luverne thing done, get that booked, we do. But we're also keen on making sure we can draw our projection onto future plans as well. And so that's part of our thinking. Octane, I'd say the same thing. The main focus has been so far on going for these niche applications like Haltermann Carless to HCS. And we will start to work on making -- looking at isobutanol for gasoline blend stocks here in the States. That will take to later this year. One of the interesting things that we also work on this year now is we just started Praj in India, this last month. Praj is making great progress, making isobutanol from molasses. The economics look to be attractive at this point, where it's able to observe isobutanol being run using molasses as a feedstock. So we had put our game plan together for how we're going to commercialize that. Praj has accessed over 300 ethanol plants and some big number like that as you can see it on their website even, but we are -- and the idea is to license our technology into those plants. I like it, it's a low-carbon fuel and it looks like it could be economical. So we got to work that into our plants as well.

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Operator [12]

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We have no further questions at this time. I will now turn the call over to Patrick Gruber for closing remarks.

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Patrick R. Gruber, Gevo, Inc. - CEO and Director [13]

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Well, thank you all for joining us. I appreciate your support. With that, we can end. Thank you, bye-bye.

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Operator [14]

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And thank you. Ladies and gentlemen, this concludes today's conference. We thank you for participating. You may now disconnect.